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The Scotia Company issues $100,000, 10% bonds at 102 on April 1, 2010. The bonds are dated...

Question:

The Scotia Company issues $100,000, 10% bonds at 102 on April 1, 2010. The bonds are dated January 1, 2010, and mature ten years from that date. Straight-line amortization is used. Interest is paid annually each December 31.

Compute the bond carrying value as of December 31, 2017.

Bonds Issue:

Bonds are issued at either par or at a premium or at a discount. The premium or discounts on bonds payable is amortized over the life of the bond. The primary methods used for amortization of bonds payable are the straight-line amortization method and the effective interest method.

Answer and Explanation:


Bonds carrying value as of Dec 31, 2017:


Face value of the bond = $100,000

Issue price of the bond = $100,000 * 102% = $102,000

Life of the bond = 10 years

Interest is payable annually at 10%

The premium on bonds issue = issue price - face value = $102,000 - $100,000 = $2,000

Straight-line amortization of premium on bonds payable = $2,000 / 10 years = $200 per year.

So, the bond's carrying value as on Dec 31, 2017, = $100,400 (refer the working table below):


Date Bonds payable balance $ (a) Premium on bonds payable opening balance $ (b) Beginning book value of the bonds payable $= (c) (a)+(b) Total interest to be paid (@ 10% annually) on (a) $ Amortization of premium on bonds payable $ Interest Expense (Interest payable ? amortization) Premium on bonds payable closing balance $ Closing book value of bonds payable $
Jan 1, 2010 $100,000 $2,000 $102,000 $0 $0 $0 $2,000 $102,000
Dec 31, 2010 $100,000 $2,000 $102,000 $10,000 $200 $9,800 $1,800 $101,800
Dec 31, 2011 $100,000 $1,800 $101,800 $10,000 $200 $9,800 $1,600 $101,600
Dec 31, 2012 $100,000 $1,600 $101,600 $10,000 $200 $9,800 $1,400 $101,400
Dec 31, 2013 $100,000 $1,400 $101,400 $10,000 $200 $9,800 $1,200 $101,200
Dec 31, 2014 $100,000 $1,200 $101,200 $10,000 $200 $9,800 $1,000 $101,000
Dec 31, 2015 $100,000 $1,000 $101,000 $10,000 $200 $9,800 $800 $100,800
Dec 31, 2016 $100,000 $800 $100,800 $10,000 $200 $9,800 $600 $100,600
Dec 31, 2017 $100,000 $600 $100,600 $10,000 $200 $9,800 $400 $100,400
Dec 31, 2018 $100,000 $400 $100,400 $10,000 $200 $9,800 $200 $100,200
Dec 31, 2019 $100,000 $200 $100,200 $10,000 $200 $9,800 $0 $100,000

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Issuing Bonds at a Discount or a Premium

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